Interim Financial Reporting Contents financial reporting.pdf · Interim Financial Reporting 477 (g)...

470 AS 25 (issued 2002)470

Accounting Standard (AS) 25(issued 2002)

Interim Financial Reporting

Contents

OBJECTIVE

SCOPE Paragraphs 1-3

DEFINITIONS 4-5

CONTENT OF AN INTERIM FINANCIAL REPORT 6-23

Minimum Components of an Interim Financial Report 9

Form and Content of Interim Financial Statements 10-14

Selected Explanatory Notes 15-17

Periods for which Interim Financial Statements arerequired to be presented 18-20

Materiality 21-23

DISCLOSURE IN ANNUAL FINANCIAL STATEMENTS 24-26

RECOGNITION AND MEASUREMENT 27-41

Same Accounting Policies as Annual 27-35

Revenues Received Seasonally or Occasionally 36-37

Costs Incurred Unevenly During the Financial Year 38

Applying the Recognition and Measurement principles 39

Use of Estimates 40-41

Continued../ . .

Interim Financial Reporting 471471

RESTATEMENT OF PREVIOUSLY REPORTED INTERIMPERIODS 42-43

TRANSITIONAL PROVISION 44

APPENDICES

The following Accounting Standards Interpretation (ASI) relates to AS 25:

ASI 27 - Applicability of AS 25 to Interim Financial Results

The above Interpretation is published elsewhere in this Compendium.

2002)472 AS 25 (issued

Accounting Standard (AS) 25*(issued 2002)

Interim Financial Reporting

(This Accounting Standard includes paragraphs set in bold italic typeand plain type, which have equal authority. Paragraphs in bold italictype indicate the main principles. This Accounting Standard should beread in the context of its objective and the Preface to the Statements ofAccounting Standards1.)

Accounting Standard (AS) 25, 'Interim Financial Reporting', issued by theCouncil of the Institute of Chartered Accountants of India, comes into effectin respect of accounting periods commencing on or after 1-4-2002. If anenterprise is required or elects to prepare and present an interim financialreport, it should comply with this Standard.2 The following is the text of theAccounting Standard.

ObjectiveThe objective of this Statement is to prescribe the minimum content of aninterim financial report and to prescribe the principles for recognition andmeasurement in a complete or condensed financial statements for an interimperiod. Timely and reliable interim financial reporting improves the ability ofinvestors, creditors, and others to understand an enterprise's capacity togenerate earnings and cash flows, its financial condition and liquidity.

* Two limited revisions to this Standard have been made in 2004 (one in March2004 and another in June 2004). Pursuant to the limited revision made in March2004, paragraph 16 of this Standard has been revised (see footnote 4). Pursuantto the limited revision made in June 2004, paragraph 29(c) and certain paragraphsof Appendix 3 to this Standard have been revised to omit the word ‘effective’at certain places with a view to align the drafting of the Standard with thecorresponding IAS.1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to whichAccounting Standards are intended to apply only to items which are material.2 Reference may be made to the section titled ‘Announcements of the Councilregarding status of various documents issued by the Institute of CharteredAccountants of India’ appearing at the beginning of this Compendium for a detaileddiscussion on the implications of the mandatory status of an accounting standard.

Scope


1. This Statement does not mandate which enterprises should berequired to present interim financial reports, how frequently, or howsoon after the end of an interim period. If an enterprise is required orelects to prepare and present an interim financial report, it shouldcomply with this Statement.

2. A statute governing an enterprise or a regulator may require anenterprise to prepare and present certain information at an interim datewhich may be different in form and/or content as required by this Statement.In such a case, the recognition and measurement principles as laid down inthis Statement are applied in respect of such information, unless otherwisespecified in the statute or by the regulator.3

3. The requirements related to cash flow statement, complete orcondensed, contained in this Statement are applicable where an enterpriseprepares and presents a cash flow statement for the purpose of its annualfinancial report.

Definitions4. The following terms are used in this Statement with the meaningsspecified:

Interim period is a financial reporting period shorter than a fullfinancial year.

Interim financial report means a financial report containing either acomplete set of financial statements or a set of condensed financialstatements (as described in this Statement) for an interim period.

5. During the first year of operations of an enterprise, its annual financialreporting period may be shorter than a financial year. In such a case, thatshorter period is not considered as an interim period.

3 See also Accounting Standards Interpretation (ASI) 27, published elsewhere inthis Compendium.

474 AS 25 (issued 2002)

Content of an Interim Financial Report6. A complete set of financial statements normally includes:

(a) balance sheet;

(b) statement of profit and loss;

(c) cash flow statement; and

(d) notes including those relating to accounting policies and otherstatements and explanatory material that are an integral part ofthe financial statements.

7. In the interest of timeliness and cost considerations and to avoidrepetition of information previously reported, an enterprise may be requiredto or may elect to present less information at interim dates as compared withits annual financial statements. The benefit of timeliness of presentation maybe partially offset by a reduction in detail in the information provided.Therefore, this Statement requires preparation and presentation of an interimfinancial report containing, as a minimum, a set of condensed financialstatements. The interim financial report containing condensed financialstatements is intended to provide an update on the latest annual financialstatements. Accordingly, it focuses on new activities, events, andcircumstances and does not duplicate information previously reported.

8. This Statement does not prohibit or discourage an enterprise frompresenting a complete set of financial statements in its interim financialreport, rather than a set of condensed financial statements. This Statementalso does not prohibit or discourage an enterprise from including, incondensed interim financial statements, more than the minimum line items orselected explanatory notes as set out in this Statement. The recognition andmeasurement principles set out in this Statement apply also to completefinancial statements for an interim period, and such statements would includeall disclosures required by this Statement (particularly the selecteddisclosures in paragraph 16) as well as those required by other AccountingStandards.

Minimum Components of an Interim Financial Report

9. An interim financial report should include, at a minimum, the


following components:

(a) condensed balance sheet;

(b) condensed statement of profit and loss;

(c) condensed cash flow statement; and

(d) selected explanatory notes.

Form and Content of Interim Financial Statements

10. If an enterprise prepares and presents a complete set of financialstatements in its interim financial report, the form and content of thosestatements should conform to the requirements as applicable to annualcomplete set of financial statements.

11. If an enterprise prepares and presents a set of condensedfinancial statements in its interim financial report, those condensedstatements should include, at a minimum, each of the headings andsub-headings that were included in its most recent annual financialstatements and the selected explanatory notes as required by thisStatement. Additional line items or notes should be included if theiromission would make the condensed interim financial statementsmisleading.

12. If an enterprise presents basic and diluted earnings per share inits annual financial statements in accordance with AccountingStandard (AS) 20, Earnings Per Share, basic and diluted earnings pershare should be presented in accordance with AS 20 on the face of thestatement of profit and loss, complete or condensed, for an interimperiod.

13. If an enterprise's annual financial report included the consolidatedfinancial statements in addition to the parent's separate financial statements,the interim financial report includes both the consolidated financialstatements and separate financial statements, complete or condensed.

14. Appendix 1 provides illustrative formats of condensed financialstatements.

476 AS 25 (issued 2002)

Selected Explanatory Notes

15. A user of an enterprise's interim financial report will ordinarily haveaccess to the most recent annual financial report of that enterprise. It is,therefore, not necessary for the notes to an interim financial report to providerelatively insignificant updates to the information that was already reportedin the notes in the most recent annual financial report. At an interim date, anexplanation of events and transactions that are significant to anunderstanding of the changes in financial position and performance of theenterprise since the last annual reporting date is more useful.

16. An enterprise should include the following information, as aminimum, in the notes to its interim financial statements, if materialand if not disclosed elsewhere in the interim financial report:

(a) a statement that the same accounting policies are followed inthe interim financial statements as those followed in the mostrecent annual financial statements or, if those policies havebeen changed, a description of the nature and effect of thechange;

(b) explanatory comments about the seasonality of interimoperations;

(c) the nature and amount of items affecting assets, liabilities,equity, net income, or cash flows that are unusual because oftheir nature, size, or incidence (see paragraphs 12 to 14 ofAccounting Standard (AS) 5, Net Profit or Loss for thePeriod, Prior Period Items and Changes in AccountingPolicies);

(d) the nature and amount of changes in estimates of amountsreported in prior interim periods of the current financial yearor changes in estimates of amounts reported in priorfinancial years, if those changes have a material effect inthe current interim period;

(e) issuances, buy-backs, repayments and restructuring of debt,equity and potential equity shares;

(f) dividends, aggregate or per share (in absolute or percentageterms), separately for equity shares and other shares;


(g) segment revenue, segment capital employed (segment assetsminus segment liabilities) and segment result for businesssegments or geographical segments, whichever is theenterprise’s primary basis of segment reporting (disclosureof segment information is required in an enterprise’s interimfinancial report only if the enterprise is required, in terms ofAS 17, Segment Reporting, to disclose segment informationin its annual financial statements);

(h) material events subsequent to the end of the interim periodthat have not been reflected in the financial statements forthe interim period;4

(i) the effect of changes in the composition of the enterpriseduring the interim period, such as amalgamations,acquisition or disposal of subsidiaries and long-terminvestments, restructurings, and discontinuing operations;and

(j) material changes in contingent liabilities since the lastannual balance sheet date.

The above information should normally be reported on a financial year-to-date basis. However, the enterprise should also disclose any eventsor transactions that are material to an understanding of the currentinterim period.

17. Other Accounting Standards specify disclosures that should be madein financial statements. In that context, financial statements mean completeset of financial statements normally included in an annual financial reportand sometimes included in other reports. The disclosures required by thoseother Accounting Standards are not required if an enterprise's interimfinancial report includes only condensed financial statements and selectedexplanatory notes rather than a complete set of financial statements.

4 The Council of the Institute decided to make a limited revision to AS 25 in 2004,pursuant to which this sub-paragraph has been added in paragraph 16 of AS 25.This revision comes into effect in respect of accounting periods commencing on orafter 1.4.2004 (see ‘The Chartered Accountant’, March 2004, pp. 1021).

478 AS 25 (issued 2002)

Periods for which Interim Financial Statements arerequired to be presented

18. Interim reports should include interim financial statements(condensed or complete) for periods as follows:

(a) balance sheet as of the end of the current interim period anda comparative balance sheet as of the end of the immediatelypreceding financial year;

(b) statements of profit and loss for the current interim periodand cumulatively for the current financial year to date, withcomparative statements of profit and loss for the comparableinterim periods (current and year-to-date) of theimmediately preceding financial year;

(c) cash flow statement cumulatively for the current financialyear to date, with a comparative statement for thecomparable year-to-date period of the immediatelypreceding financial year.

19. For an enterprise whose business is highly seasonal, financialinformation for the twelve months ending on the interim reporting date andcomparative information for the prior twelve-month period may be useful.Accordingly, enterprises whose business is highly seasonal are encouragedto consider reporting such information in addition to the information calledfor in the preceding paragraph.

20. Appendix 2 illustrates the periods required to be presented by anenterprise that reports half-yearly and an enterprise that reports quarterly.

Materiality

21. In deciding how to recognise, measure, classify, or disclose anitem for interim financial reporting purposes, materiality shouldbe assessed in relation to the interim period financial data. Inmakingassessments of materiality, it should be recognised that interimmeasurements may rely on estimates to a greater extent thanmeasurements of annual financial data.

22. The Preface to the Statements of Accounting Standards states that


“The Accounting Standards are intended to apply only to items which arematerial”. The Framework for the Preparation and Presentation of FinancialStatements, issued by the Institute of Chartered Accountants of India, statesthat “information is material if its misstatement (i.e., omission or erroneousstatement) could influence the economic decisions of users taken on thebasis of the financial information”.

23. Judgement is always required in assessing materiality for financialreporting purposes. For reasons of understandability of the interim figures,materiality for making recognition and disclosure decision is assessed inrelation to the interim period financial data. Thus, for example, unusual orextraordinary items, changes in accounting policies or estimates, and priorperiod items are recognised and disclosed based on materiality in relation tointerim period data. The overriding objective is to ensure that an interimfinancial report includes all information that is relevant to understanding anenterprise's financial position and performance during the interim period.

Disclosure in Annual Financial Statements24. An enterprise may not prepare and present a separate financial reportfor the final interim period because the annual financial statements arepresented. In such a case, paragraph 25 requires certain disclosures to bemade in the annual financial statements for that financial year.

25. If an estimate of an amount reported in an interim period ischanged significantly during the final interim period of the financialyear but a separate financial report is not prepared and presented forthat final interim period, the nature and amount of that change inestimate should be disclosed in a note to the annual financial statementsfor that financial year.

26. Accounting Standard (AS) 5, Net Profit or Loss for the Period, PriorPeriod Items and Changes in Accounting Policies, requires disclosure, infinancial statements, of the nature and (if practicable) the amount of achange in an accounting estimate which has a material effect in the currentperiod, or which is expected to have a material effect in subsequent periods.Paragraph 16(d) of this Statement requires similar disclosure in an interimfinancial report. Examples include changes in estimate in the final interimperiod relating to inventory write-downs, restructurings, or impairment lossesthat were reported in an earlier interim period of the financial year. The

480 AS 25 (issued 2002)

disclosure required by the preceding paragraph is consistent with AS 5requirements and is intended to be restricted in scope so as to relate only tothe change in estimates. An enterprise is not required to include additionalinterim period financial information in its annual financial statements.

Recognition and Measurement

Same Accounting Policies as Annual

27. An enterprise should apply the same accounting policies in itsinterim financial statements as are applied in its annual financialstatements, except for accounting policy changes made after the date ofthe most recent annual financial statements that are to be reflected in thenext annual financial statements. However, the frequency of anenterprise's reporting (annual, half-yearly, or quarterly) should notaffect the measurement of its annual results. To achieve that objective,measurements for interim reporting purposes should be made on a year-to-date basis.

28. Requiring that an enterprise apply the same accounting policies in itsinterim financial statements as in its annual financial statements may seemto suggest that interim period measurements are made as if each interimperiod stands alone as an independent reporting period. However, byproviding that the frequency of an enterprise's reporting should not affectthe measurement of its annual results, paragraph 27 acknowledges that aninterim period is a part of a financial year. Year-to-date measurements mayinvolve changes in estimates of amounts reported in prior interim periods ofthe current financial year. But the principles for recognising assets, liabilities,income, and expenses for interim periods are the same as in annual financialstatements.

29. To illustrate:

(a) the principles for recognising and measuring losses frominventory write-downs, restructurings, or impairments in aninterim period are the same as those that an enterprise wouldfollow if it prepared only annual financial statements. However, ifsuch items are recognised and measured in one interim periodand the estimate changes in a subsequent interim period of thatfinancial year, the original estimate is changed in the subsequent


interim period either by accrual of an additional amount of loss orby reversal of the previously recognised amount;

(b) a cost that does not meet the definition of an asset at the end ofan interim period is not deferred on the balance sheet date eitherto await future information as to whether it has met the definitionof an asset or to smooth earnings over interim periods within afinancial year; and

(c) income tax expense is recognised in each interim period based onthe best estimate of the weighted average annual income tax rateexpected for the full financial year. Amounts accrued for incometax expense in one interim period may have to be adjusted in asubsequent interim period of that financial year if the estimate ofthe annual income tax rate changes.

30. Under the Framework for the Preparation and Presentation ofFinancial Statements, recognition is the “process of incorporating in thebalance sheet or statement of profit and loss an item that meets the definitionof an element and satisfies the criteria for recognition”. The definitions ofassets, liabilities, income, and expenses are fundamental to recognition, bothat annual and interim financial reporting dates.

31. For assets, the same tests of future economic benefits apply at interimdates as they apply at the end of an enterprise's financial year. Costs that, bytheir nature, would not qualify as assets at financial year end would notqualify at interim dates as well. Similarly, a liability at an interim reportingdate must represent an existing obligation at that date, just as it must at anannual reporting date.

32. Income is recognised in the statement of profit and loss when anincrease in future economic benefits related to an increase in an asset or adecrease of a liability has arisen that can be measured reliably. Expenses arerecognised in the statement of profit and loss when a decrease in futureeconomic benefits related to a decrease in an asset or an increase of aliability has arisen that can be measured reliably. The recognition of items inthe balance sheet which do not meet the definition of assets or liabilities isnot allowed.

33. In measuring assets, liabilities, income, expenses, and cash flowsreported in its financial statements, an enterprise that reports only annually is

482 AS 25 (issued 2002)

able to take into account information that becomes available throughout thefinancial year. Its measurements are, in effect, on a year-to-date basis.

34. An enterprise that reports half-yearly, uses information available bymid-year or shortly thereafter in making the measurements in its financialstatements for the first six-month period and information available by year-end or shortly thereafter for the twelve-month period. The twelve-monthmeasurements will reflect any changes in estimates of amounts reported forthe first six-month period. The amounts reported in the interim financialreport for the first six-month period are not retrospectively adjusted.Paragraphs 16(d) and 25 require, however, that the nature and amount ofany significant changes in estimates be disclosed.

35. An enterprise that reports more frequently than half-yearly, measuresincome and expenses on a year-to-date basis for each interim period usinginformation available when each set of financial statements is beingprepared. Amounts of income and expenses reported in the current interimperiod will reflect any changes in estimates of amounts reported in priorinterim periods of the financial year. The amounts reported in prior interimperiods are not retrospectively adjusted. Paragraphs 16(d) and 25 require,however, that the nature and amount of any significant changes in estimatesbe disclosed.

Revenues Received Seasonally or Occasionally

36. Revenues that are received seasonally or occasionally within afinancial year should not be anticipated or deferred as of an interimdate if anticipation or deferral would not be appropriate at the end ofthe enterprise's financial year.

37. Examples include dividend revenue, royalties, and government grants.Additionally, some enterprises consistently earn more revenues in certaininterim periods of a financial year than in other interim periods, for example,seasonal revenues of retailers. Such revenues are recognised when theyoccur.

Costs Incurred Unevenly During the Financial Year

38. Costs that are incurred unevenly during an enterprise's financialyear should be anticipated or deferred for interim reporting purposes


if, and only if, it is also appropriate to anticipate or defer that type ofcost at the end of the financial year.

Applying the Recognition and Measurement principles

39. Appendix 3 provides examples of applying the general recognition andmeasurement principles set out in paragraphs 27 to 38.

Use of Estimates

40. The measurement procedures to be followed in an interimfinancial report should be designed to ensure that the resultinginformation is reliable and that all material financial information that

is relevant to an understanding of the financial position or performanceof the enterprise is appropriately disclosed. While measurements inboth annual and interim financial reports are often based on reasonableestimates, the preparation of interim financial reports generally willrequire a greater use of estimation methods than annual financialreports.

41. Appendix 4 provides examples of the use of estimates in interimperiods.

Restatement of Previously Reported InterimPeriods42. A change in accounting policy, other than one for which thetransition is specified by an Accounting Standard, should be reflectedby restating the financial statements of prior interim periods of thecurrent financial year.

43. One objective of the preceding principle is to ensure that a singleaccounting policy is applied to a particular class of transactions throughoutan entire financial year. The effect of the principle in paragraph 42 is torequire that within the current financial year any change in accounting policybe applied retrospectively to the beginning of the financial year.

Transitional Provision44. On the first occasion that an interim financial report is presented in

484 AS 25 (issued 2002)

accordance with this Statement, the following need not be presented inrespect of all the interim periods of the current financial year:

(a) comparative statements of profit and loss for the comparableinterim periods (current and year-to-date) of the immediatelypreceding financial year; and

(b) comparative cash flow statement for the comparable year-to-date period of the immediately preceding financial year.

Appendix 1


Illustrative Format of Condensed Financial Statements

This Appendix, which is illustrative and does not form part of theAccounting Standard, provides illustrative format of condensedfinancial statements. The purpose of the appendix is to illustrate theapplication of the Accounting Standard to assist in clarifying itsmeaning.

Paragraph 11 of the Accounting Standard provides that if an enterpriseprepares and presents a set of condensed financial statements in itsinterim financial report, those condensed statements should include, ata minimum, each of the headings and sub-headings that were includedin its most recent annual financial statements and the selectedexplanatory notes as required by the Standard. Additional line items ornotes should be included if their omission would make the condensedinterim financial statements misleading.

The purpose of the following illustrative format is primarily to illustratethe requirements of paragraph 11 of the Standard. It may be noted thatthese illustrative formats are subject to the requirements laid down inthe Standard including those of paragraph 11.

486 AS 25 (issued 2002)

Illustrative Format of Condensed Financial Statements foran enterprise other than a bank

(A) Condensed Balance SheetFigures at the

end of thecurrent interim

period

Figures at theend of theprevious

accounting yearI. Sources of Funds1. Capital2. Reserve and surplus3. Minority interests (in case of

consolidated financialstatements)

4. Loan funds:(a) Secured loans(b) Unsecured loans

TotalII. Application of Funds1. Fixed assets

(a) Tangible fixed assets(b) Intangible fixed assets

2. Investments3. Current assets, loans and

advances(a) Inventories(b) Sundry debtors(c) Cash and bank balances(d) Loans and advances(e) Others

Less: Current liabilities andprovisions

(a) Liabilities(b) Provisions

Net Current assets4. Miscellaneous expenditure

to the extent not written offor adjusted

5. Profit and loss accountTotal


(B) Condensed Statement of Profit and LossThree

monthsended

Correspondingthree months of

the previousaccounting year

Year-to-datefigures for

currentperiod


the previousyear

1. Turnover2. Other Income

Total3. Changes in inventories

of finished goods andwork in progress

4. Cost of raw materialsand consumables used

5. Salaries, wages andother staff costs

6. Other expenses7. Interest8. Depreciation and

amortisationsTotal

9. Profit or loss fromordinary activitiesbefore tax

10. Extraordinary items11. Profit or loss before tax12. Tax expense13. Profit or loss after tax14. Minority Interests

(in case of consolidatedfinancial statements)

15. Net profit or loss forthe period

Earnings Per Share1. Basic Earnings

Per Share2. Diluted Earnings

Per Share

488 AS 25 (issued 2002)

(C) Condensed Cash Flow StatementYear-to-date

figures for thecurrent period

Year-to-datefigures for theprevious year

1. Cash flows from operatingactivities

2. Cash flows from investingactivities

3. Cash flows from financingactivities

4. Net increase/(decrease)in cash and cashequivalents

5. Cash and cash equivalentsat beginning of period

6. Cash and cash equivalentsat end of period

(D) Selected Explanatory Notes

This part should contain selected explanatory notes as required by para-graph 16 of this Statement.


Illustrative Format of Condensed Financial Statements fora Bank

(A) Condensed Balance Sheet

Figures at theend of the

current interimperiod

Figures at theend of theprevious

accounting year

I. Capital and Liabilities1. Capital2. Reserve and surplus3. Minority interests


4. Deposits5. Borrowings6. Other liabilities and

provisionsTotal

II. Assets1. Cash and balances with

Reserve Bank of India2. Balances with banks and

money at call and shortnotice

3. Investments4. Advances5. Fixed assets

(a) Tangible fixed assets(b) Intangible fixed assets

6. Other AssetsTotal

490 AS 25 (issued 2002)

(B) Condensed Statement of Profit and Loss

Threemonthsended

Correspondingthreemonthsof

thepreviousaccountingyear


currentperiod


thepreviousyear

1. Interest earned(a) Interest/discount on

advances/bills(b) Interest on

Investments(c) Interest on balances

with Reserve Bankof India and otherinter banks funds

(d) Others2. Other Income

Total Income1. Interest expended2. Operating expenses

(a) Payments to andprovisions foremployees

(b) Other operatingexpenses

3. Total expenses(excluding provisionsand contingencies)

4. Operating profit (profitbefore provisions andcontingencies)

5. Provisions andcontingencies

6. Profit or loss fromordinary activitiesbefore tax

7. Extraordinary items8. Profit or loss before tax9. Tax expense


(B) Condensed Statement of Profit and Loss (Contd.)

Threemonthsended

Correspondingthreemonthsof

thepreviousaccountingyear


currentperiod


thepreviousyear

10. Profit or loss after tax11. Minority Interests


12. Net profit or loss forthe period

Earnings Per Share1. Basic Earnings

Per Share2. Diluted Earnings

Per Share

(C) Condensed Cash Flow StatementYear-to-date

figures for thecurrent period

Year-to-datefigures for theprevious year

1. Cash flows from operatingactivities

2. Cash flows from investingactivities

3. Cash flows from financingactivities

4. Net increase/(decrease)in cash and cashequivalents

5. Cash and cash equivalentsat beginning of period

6. Cash and cash equivalentsat end of period

(D) Selected Explanatory NotesThis part should contain selected explanatory notes as required by paragraph16 of this Statement.

492 AS 25 (issued 2002)

Appendix 2

Illustration of Periods Required to Be Presented

This Appendix, which is illustrative and does not form part of theAccounting Standard, provides examples to illustrate application of theprinciples in paragraphs 18 and 19. The purpose of the appendix is toillustrate the application of the Accounting Standard to assist inclarifying its meaning.

Enterprise Preparing and Presenting Interim Financial ReportsHalf-Yearly

1. An enterprise whose financial year ends on 31 March, presentsfinancial statements (condensed or complete) for following periods in itshalf-yearly interim financial report as of 30 September 2001:

Balance Sheet:

As at 30 September 2001 31 March 2001

Statement of Profit and Loss:

6 months ending 30 September 2001 30 September 2000

Cash Flow Statement5:


Enterprise Preparing and Presenting Interim Financial ReportsQuarterly

2. An enterprise whose financial year ends on 31 March, presentsfinancial statements (condensed or complete) for following periods in itsinterim financial report for the second quarter ending 30 September 2001:

5 It is assumed that the enterprise prepares a cash flow statement for the purposeof its Annual Report.


Balance Sheet:





Cash Flow Statement:


Enterprise whose business is highly seasonal Preparing andPresenting Interim Financial Reports Quarterly

3. An enterprise whose financial year ends on 31 March, may presentfinancial statements (condensed or complete) for the following periodsin its interim financial report for the second quarter ending 30September2001:

Balance Sheet:


30 September 2000





Cash Flow Statement:



494 AS 25 (issued 2002)

Appendix 3

Examples of Applying the Recognition and MeasurementPrinciples

This Appendix, which is illustrative and does not form part of theAccounting Standard, provides examples of applying the generalrecognition and measurement principles set out in paragraphs 27-38 ofthis Standard. The purpose of the appendix is to illustrate theapplication of the Accounting Standard to assist in clarifying itsmeaning.

Gratuity and Other Defined Benefit Schemes

1. Provisions in respect of gratuity and other defined benefit schemes foran interim period are calculated on a year-to-date basis by using theactuarially determined rates at the end of the prior financial year, adjustedfor significant market fluctuations since that time and for significantcurtailments, settlements, or other significant one-time events.

Major Planned Periodic Maintenance or Overhaul

2. The cost of a major planned periodic maintenance or overhaul or otherseasonal expenditure that is expected to occur late in the year is notanticipated for interim reporting purposes unless an event has caused theenterprise to have a present obligation. The mere intention or necessity toincur expenditure related to the future is not sufficient to give rise to anobligation.

Provisions

3. This Statement requires that an enterprise apply the same criteria forrecognising and measuring a provision at an interim date as it would at theend of its financial year. The existence or non-existence of an obligation totransfer economic benefits is not a function of the length of the reportingperiod. It is a question of fact subsisting on the reporting date.

Year-End Bonuses

4. The nature of year-end bonuses varies widely. Some are earned simply


by continued employment during a time period. Some bonuses are earnedbased on monthly, quarterly, or annual measure of operating result. Theymay be purely discretionary, contractual, or based on years ofhistorical precedent.

5. A bonus is anticipated for interim reporting purposes if, and only if, (a)the bonus is a legal obligation or an obligation arising from past practice forwhich the enterprise has no realistic alternative but to make the payments,and (b) a reliable estimate of the obligation can be made.

Intangible Assets

6. An enterprise will apply the definition and recognition criteria for anintangible asset in the same way in an interim period as in an annual period.Costs incurred before the recognition criteria for an intangible asset are metare recognised as an expense. Costs incurred after the specific point in timeat which the criteria are met are recognised as part of the cost of anintangible asset. "Deferring" costs as assets in an interim balance sheet inthe hope that the recognition criteria will be met later in the financial year isnot justified.

Other Planned but Irregularly Occurring Costs

7. An enterprise's budget may include certain costs expected to beincurred irregularly during the financial year, such as employee trainingcosts. These costs generally are discretionary even though they are plannedand tend to recur from year to year. Recognising an obligation at an interimfinancial reporting date for such costs that have not yet been incurredgenerally is not consistent with the definition of a liability.

Measuring Income Tax Expense for Interim Period

8. Interim period income tax expense is accrued using the tax rate thatwould be applicable to expected total annual earnings, that is, the estimatedaverage annual effective income tax rate applied to the pre-tax income ofthe interim period.

9. This is consistent with the basic concept set out in paragraph 27 that thesame accounting recognition and measurement principles should be appliedin an interim financial report as are applied in annual financial statements.Income taxes are assessed on an annual basis. Therefore, interim period

496 AS 25 (issued 2002)

income tax expense is calculated by applying, to an interim period's pre-taxincome, the tax rate that would be applicable to expected total annualearnings, that is, the estimated average effective annual income tax rate.That estimated average annual income tax rate would reflect the tax ratestructure expected to be applicable to the full year's earnings includingenacted or substantively enacted changes in the income tax rates scheduledto take effect later in the financial year. The estimated average annualincome tax rate would be re-estimated on a year-to-date basis, consistentwith paragraph 27 of this Statement. Paragraph 16(d) requires disclosure ofa significant change in estimate.

10. To the extent practicable, a separate estimated average annual effectiveincome tax rate is determined for each governing taxation law and appliedindividuallyto the interimperiodpre-tax incomeundersuch laws.Similarly, ifdifferent income tax rates apply to different categories of income (such ascapital gains or income earned in particular industries), to the extentpracticable a separate rate is applied to each individual category of interimperiod pre-tax income. While that degree of precision is desirable, it may notbe achievable in all cases, and a weighted average of rates across suchgoverning taxation laws or across categories of income is used if it is areasonable approximation of the effect of using more specific rates.

11. As illustration, an enterprise reports quarterly, earns Rs. 150 lakhs pre-tax profit in the first quarter but expects to incur losses of Rs 50 lakhs in eachof the three remaining quarters (thus having zero income for the year), and isgoverned by taxation laws according to which its estimated average annualincome tax rate is expected to be 35 per cent. The following table shows theamount of income tax expense that is reported in each quarter:

Tax

(Amount in Rs. lakhs)

1st 2nd 3rd 4th

Quarter Quarter Quarter Quarter Annual

Expense 52.5 (17.5) (17.5) (17.5) 0

Difference in Financial Reporting Year and Tax Year

12. If the financial reporting year and the income tax year differ, incometax expense for the interim periods of that financial reporting year ismeasured using separate weighted average estimated effective tax rates for

Tax Expense 30 30 40 40 140


each of the income tax years applied to the portion of pre-tax income earnedin each of those income tax years.

13. To illustrate, an enterprise's financial reporting year ends 30September and it reports quarterly. Its year as per taxation laws ends 31March. For the financial year that begins 1 October, Year 1 ends 30September of Year 2, the enterprise earns Rs 100 lakhs pre-tax eachquarter. The estimated weighted average annual income tax rate is 30 percent in Year 1 and 40 per cent in Year 2.

(Amount in Rs. lakhs)Quarter Quarter Quarter Quarter YearEnding Ending Ending Ending Ending31 Dec. 31 Mar. 30 June 30 Sep. 30 Sep.Year 1 Year 1 Year 2 Year 2 Year 2

Tax Deductions/Exemptions

14. Tax statutes may provide deductions/exemptions in computation ofincome for determining tax payable. Anticipated tax benefits of this type forthe full year are generally reflected in computing the estimated annualeffective income tax rate, because these deductions/exemptions arecalculated on an annual basis under the usual provisions of tax statutes. Onthe other hand, tax benefits that relate to a one-time event are recognised incomputing income tax expense in that interim period, in the same way thatspecial tax rates applicable to particular categories of income are not blendedinto a single effective annual tax rate.

Tax Loss Carryforwards

15. A deferred tax asset should be recognised in respect of carryforwardtax losses to the extent that it is virtually certain, supported by convincingevidence, that future taxable income will be available against which thedeferred tax assets can be realised. The criteria are to be applied at the endof each interim period and, if they are met, the effect of the tax losscarryforward is reflected in the computation of the estimated average annualeffective income tax rate.

498 AS 25 (issued 2002)

16. To illustrate, an enterprise that reports quarterly has an operating losscarryforward of Rs 100 lakhs for income tax purposes at the start of thecurrent financial year for which a deferred tax asset has not been recognised.The enterprise earns Rs 100 lakhs in the first quarter of the current year andexpects toearnRs100 lakhs ineachof the threeremainingquarters.Excludingthe loss carryforward, the estimated average annual income tax rate isexpected to be 40 per cent. The estimated payment of the annual tax on Rs.400 lakhs of earnings for the current year would be Rs. 120 lakhs {(Rs. 400lakhs - Rs. 100 lakhs) x 40%}. Considering the loss carryforward, theestimated average annual effective income tax rate would be 30% {(Rs. 120lakhs/Rs. 400 lakhs) x 100}. This average annual effective income tax ratewould be applied to earnings of each quarter.Accordingly, tax expense wouldbe as follows:

(Amount in Rs. lakhs)

1st 2n d 3r d 4th

Quarter Quarter Quarter Quarter Annual

Tax Expense 30.00 30.00 30.00 30.00 120.00

Contractual or Anticipated Purchase Price Changes

17. Volume rebates or discounts and other contractual changes in theprices of goods and services are anticipated in interim periods, if it isprobable that they will take effect. Thus, contractual rebates and discountsare anticipated but discretionary rebates and discounts are not anticipatedbecause the resulting liability would not satisfy the conditions of recognition,viz., that a liability must be a present obligation whose settlement is expectedto result in an outflow of resources.

Depreciation and Amortisation

18. Depreciation and amortisation for an interim period is based only onassets owned during that interim period. It does not take into account assetacquisitions or disposals planned for later in the financial year.

Inventories

19. Inventories are measured for interim financial reporting by the sameprinciples as at financial year end. AS 2 on Valuation of Inventories,


establishes standards for recognising and measuring inventories.Inventories pose particular problems at any financial reporting date becauseof the need to determine inventory quantities, costs, and net realisablevalues. Nonetheless, the same measurement principles are applied forinterim inventories. To save cost and time, enterprises often use estimates tomeasure inventories at interim dates to a greater extent than at annualreporting dates. Paragraph 20 below provides an example of how to applythe net realisable value test at an interim date.

Net Realisable Value of Inventories

20. The net realisable value of inventories is determined by reference toselling prices and related costs to complete and sell the inventories. Anenterprise will reverse a write-down to net realisable value in a subsequentinterim period as it would at the end of its financial year.

Foreign Currency Translation Gains and Losses

21. Foreign currency translation gains and losses are measured for interimfinancial reporting by the same principles as at financial year end inaccordance with the principles as stipulated in AS 11 on Accounting for theEffects of Changes in Foreign Exchange Rates6 .

Impairment of Assets

22. Accounting Standard on Impairment of Assets7 requires that animpairment loss be recognised if the recoverable amount has declined belowcarrying amount.

23. An enterprise applies the same impairment tests, recognition, andreversal criteria at an interim date as it would at the end of its financial year.That does not mean, however, that an enterprise must necessarily make adetailed impairment calculation at the end of each interim period. Rather, anenterprise will assess the indications of significant impairment since the endof the most recent financial year to determine whether such a calculation isneeded.

6 AS 11 has been revised in 2003, and titled as ‘The Effects of Changes in ForeignExchanges Rates’ . The revised Standard is published elsewhere in thisCompendium.7 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirementsrelating to impairment of assets.

500 AS 25 (issued 2002)

Appendix 4

Examples of the Use of Estimates

This Appendix, which is illustrative and does not form part of theAccounting Standard, provides examples to illustrate application of theprinciples in this Standard. The purpose of the appendix is to illustratethe application of the Accounting Standard to assist in clarifying itsmeaning.

1. Provisions: Determination of the appropriate amount of a provision(such as a provision for warranties, restructuring costs, gratuity, etc.) maybe complex and often costly and time-consuming. Enterprises sometimesengage outside experts to assist in annual calculations. Making similarestimates at interim dates often involves updating the provision made in thepreceding annual financial statements rather than engaging outside expertsto do a new calculation.

2. Contingencies: Measurement of contingencies may involve obtainingopinions of legal experts or other advisers. Formal reports from independentexperts are sometimes obtained with respect to contingencies. Such opinionsabout litigation, claims, assessments, and other contingencies anduncertainties may or may not be needed at interim dates.

3. Specialised industries: Because of complexity, costliness, and timeinvolvement, interim period measurements in specialised industries might beless precise than at financial year end. An example is calculation ofinsurance reserves by insurance companies.

Accounting Standard (AS) 26(issued 2002)

Intangible Assets

501

Contents

OBJECTIVE

SCOPE Paragraphs 1-5

DEFINITIONS 6-18

Intangible Assets 7-18

Identifiability 11-13

Control 14-17

Future Economic Benefits 18

RECOGNITION AND INITIAL MEASUREMENT OF ANINTANGIBLE ASSET 19-54

Separate Acquisition 24-26

Acquisition as Part of an Amalgamation 27-32

Acquisition by way of a Government Grant 33

Exchanges of Assets 34

Internally Generated Goodwill 35-37

Internally Generated Intangible Assets 38-54

Research Phase 41-43

Development Phase 44-51

Cost of an Internally Generated Intangible Asset 52-54

Continued../ . .

502

RECOGNITION OF AN EXPENSE 55-58

Past Expenses not to be Recognised as an Asset 58

SUBSEQUENT EXPENDITURE 59-61

MEASUREMENT SUBSEQUENT TO INITIALRECOGNITION 62

AMORTISATION 63-80

Amortisation Period 63-71

Amortisation Method 72-74

Residual Value 75-77

Review of Amortisation Period and Amortisation Method 78-80

RECOVERABILITY OF THE CARRYING AMOUNT –IMPAIRMENT LOSSES 81-86

RETIREMENTS AND DISPOSALS 87-89

DISCLOSURE 90-98

General 90-95

Research and Development Expenditure 96-97

Other Information 98

TRANSITIONAL PROVISIONS 99-100

APPENDICES

Accounting Standard (AS) 26*(issued 2002)

Intangible Assets

(This Accounting Standard includes paragraphs set in bold italic typeand plain type, which have equal authority. Paragraphs in bold italictype indicate the main principles. This Accounting Standard should beread in the context of its objective and the Preface to the Statements ofAccounting Standards1.)

Accounting Standard (AS) 26, 'Intangible Assets', issued by the Council ofthe Institute of Chartered Accountants of India, comes into effect in respectof expenditure incurred on intangible items during accounting periodscommencing on or after 1-4-2003 and is mandatory in nature2 from that datefor the following:

* It may be noted that the Institute has issued an Announcement in 2003 titled‘Applicability of Accounting Standard (AS) 26, Intangible Assets, toIntangible Items’ (published in ‘The Chartered Accountant’, November 2003, pp.479). The Announcement deals with the issue as to what should be thetreatment of the expenditure incurred on intangible items, which were treated asdeferred revenue expenditure and ordinarily spread over a period of 3 to 5 yearsbefore AS 26 became mandatory and which do not meet the definition of an‘asset’ as per AS 26. The full text of the above Announcement has beenreproduced in the section titled‘Announcements of the Council regarding status of various documents issuedby the Institute of Chartered Accountants of India’ appearing at the beginningof this Compendium.

It may also be noted that a limited revision to this Standard has been made in2004, pursuant to which paragraph 1 of this Standard has been revised (seefootnote 4). Pursuant to this limited revision, which comes into effect in respectof accounting periods commencing on or after 1-4-2003, the aboveAnnouncement stands superseded to the extent it deals with VRS expenditure,from the aforesaid date (see ‘The Chartered Accountant’, April 2004, pp.1157).1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to whichAccounting Standards are intended to apply only to items which are material.2 Reference may be made to the section titled ‘Announcements of the Councilregarding status of various documents issued by the Institute of CharteredAccountants of India’ appearing at the beginning of this Compendium for adetailed discussion on the implications of the mandatory status of an accountingstandard.

504 AS 26 (issued 2002)

(i) Enterprises whose equity or debt securities are listed on arecognised stock exchange in India, and enterprises that are inthe process of issuing equity or debt securities that will be listedon a recognised stock exchange in India as evidenced by theboard of directors' resolution in this regard.

(ii) All other commercial, industrial and business reporting enterprises,whose turnover for the accounting period exceeds Rs. 50 crores.

In respect of all other enterprises, the Accounting Standard comes into effectin respect of expenditure incurred on intangible items during accountingperiods commencing on or after 1-4-2004 and is mandatory in nature fromthat date.

Earlier application of the Accounting Standard is encouraged.

In respect of intangible items appearing in the balance sheet as on theaforesaid date, i.e., 1-4-2003 or 1-4-2004, as the case may be, the Standardhas limited application as stated in paragraph 99. From the date of this Standardbecoming mandatory for the concerned enterprises, the following standwithdrawn:

(i) Accounting Standard (AS) 8, Accounting for Research andDevelopment;

(ii) Accounting Standard (AS) 6, Depreciation Accounting, withrespect to the amortisation (depreciation) of intangibleassets; and

(iii) Accounting Standard (AS) 10, Accounting for Fixed Assets -paragraphs 16.3 to 16.7, 37 and 38.

The following is the text of the Accounting Standard.

ObjectiveThe objective of this Statement is to prescribe the accounting treatment forintangible assets that are not dealt with specifically in another AccountingStandard. This Statement requires an enterprise to recognise an intangibleasset if, and only if, certain criteria are met. The Statement also specifies

Intangible Assets 505

how to measure the carrying amount of intangible assets and requires certaindisclosures about intangible assets.

Scope1. This Statement should be applied by all enterprises in accountingfor intangible assets, except:

(a) intangible assets that are covered by another AccountingStandard;

(b) financial assets3;

(c) mineral rights and expenditure on the exploration for, ordevelopment and extraction of, minerals, oil, natural gas andsimilar non-regenerative resources; and

(d) intangible assets arising in insurance enterprises fromcontracts with policyholders.

4This Statement should not be applied to expenditure in respect oftermination benefits5 also.

2. If another Accounting Standard deals with a specific type of intangibleasset, an enterprise applies that Accounting Standard instead of thisStatement. For example, this Statement does not apply to:3 A financial asset is any asset that is :

(a) cash;(b) a contractual right to receive cash or another financial asset from another

enterprise;(c) a contractual right to exchange financial instruments with another

enterprise under conditions that are potentially favourable; or(d) an ownership interest in another enterprise.

4 The Council of the Institute decided to make a limited revision to AS 26 in 2004,pursuant to which the last sentence has been added to paragraph 1. Thisrevision comes into effect in respect of accounting periods commencing on orafter 1.4.2003 (see ‘The Chartered Accountant’, April 2004, pp. 1157).5 Accounting Standard (AS) 15 (revised 2005), Employee Benefits, which comesinto effect in respect of accounting periods commencing on or after 1-4-2006,specifies the requirements relating to accounting for ‘Termination Benefits’.

506 AS 26 (issued 2002)

(a) intangible assets held by an enterprise for sale in the ordinarycourse of business (see AS 2, Valuation of Inventories, and AS 7,Accounting for Construction Contracts6);

(b) deferred tax assets (see AS 22, Accounting for Taxes on Income);

(c) leases that fall within the scope of AS 19, Leases; and

(d) goodwill arising on an amalgamation (see AS 14, Accounting forAmalgamations) and goodwill arising on consolidation (see AS21, Consolidated Financial Statements).

3. This Statement applies to, among other things, expenditure on advertising,training, start-up, research and development activities. Researchand development activities are directed to the development ofknowledge. Therefore, although these activities may result in an assetwith physical substance (for example, a prototype), the physical elementof the asset is secondary to its intangible component, that is the knowledgeembodied in it. This Statement also applies to rights under licensingagreements for items such as motion picture films, video recordings,plays, manuscripts, patents and copyrights. These items are excluded fromthe scope of AS 19.

4. In the case of a finance lease, the underlying asset may be either tangibleor intangible. After initial recognition, a lessee deals with an intangible assetheld under a finance lease under this Statement.

5. Exclusions from the scope of an Accounting Standard may occur ifcertain activities or transactions are so specialised that they give rise toaccounting issues that may need to be dealt with in a different way. Suchissues arise in the expenditure on the exploration for, or development andextraction of, oil, gas and mineral deposits in extractive industries and in thecase of contracts between insurance enterprises and their policyholders.Therefore, this Statement does not apply to expenditure on such activities.However, this Statement applies to other intangible assets used (such ascomputer software), and other expenditure (such as start-up costs), inextractive industries or by insurance enterprises. Accounting issues ofspecialised nature also arise in respect of accounting for discount or premium

6 This Standard has been revised and titled as ‘Construction Contracts’. Therevised AS 7 is published elsewhere in this Compendium.

Intangible Assets 507

relating to borrowings and ancillary costs incurred in connection with thearrangement of borrowings, share issue expenses and discount allowed onthe issue of shares. Accordingly, this Statement does not apply to such itemsalso.

Definitions6. The following terms are used in this Statement with the meaningsspecified:

An intangible asset is an identifiable non-monetary asset, withoutphysical substance, held for use in the production or supply of goods orservices, for rental to others, or for administrative purposes.

An asset is a resource:

(a) controlled by an enterprise as a result of past events; and

(b) from which future economic benefits are expected to flow tothe enterprise.

Monetary assets are money held and assets to be received in fixed ordeterminable amounts of money.

Non-monetary assets are assets other than monetary assets.

Research is original and planned investigation undertaken with theprospect of gaining new scientific or technical knowledge andunderstanding.

Development is the application of research findings or other knowledgeto a plan or design for the production of new or substantially improvedmaterials, devices, products, processes, systems or services prior to thecommencement of commercial production or use.

Amortisation is the systematic allocation of the depreciable amount ofan intangible asset over its useful life.

Depreciable amount is the cost of an asset less its residual value.

Interim Financial Reporting Contents financial reporting.pdf · Interim Financial Reporting 477 (g)...

Documents

Transcript of Interim Financial Reporting Contents financial reporting.pdf · Interim Financial Reporting 477 (g)...